(Bloomberg News) Carl Icahn agreed to allocate as much as $3 billion to a management duo composed of his son Brett and David Schechter, expanding their role in running the 76-year-old's investments.

Under a 46-page legal agreement filed with federal regulators last month, Brett Icahn and Schechter will get to invest their boss's capital in companies with stock market values between $750 million and $10 billion. The deal may free the elder Icahn, who still has final say over many aspects of the portfolio, to focus on larger targets for shareholder activism.

Brett, who turns 33 this month, along with Schechter has been running $300 million for his father, who owns more than 90 percent of Icahn Enterprises LP, a holding company with $24 billion in assets including activist investing partnerships as well as the Tropicana casinos, an oil refiner and an auto-parts maker. The arrangement expires after Carl turns 80 in 2016, giving Brett the chance to both prove his mettle as a successor and develop a track record to start his own hedge fund.

"It's a pretty nice gesture by the old man," said Michael McAllister, a partner at Satterlee Stephens Burke & Burke LLP in New York who specializes in employment law within the securities industry. "If the son doesn't meet the standard Carl is looking for, it gives Brett an opportunity to go out and earn his own."

After hiring Brett as an investment analyst a decade ago, Icahn allocated the $300 million to his son and Schechter in April 2010 to invest in loans and securities of companies with less than $2 billion in equity value. Their investments, internally dubbed the Sargon portfolio, generated a gross cumulative gain of 96 percent by the end of June, according to a July 27 filing with the U.S. Securities and Exchange Commission.

'Can't Complain'

Schechter joined the firm in 2004 after working at a Citigroup Inc. unit that used the bank's capital to invest in distressed companies. Schechter, who earned an economics degree from the University of Pennsylvania, serves on the boards of several companies in which Icahn holds stakes, including WebMD Health Corp. and auto-parts supplier Federal-Mogul Corp.

"These two guys doubled our money over the last two years," the elder Icahn said in an interview. "You can't complain about that." Brett didn't return an e-mail seeking comment.

The filing included a new accord that Icahn reached on July 24 with Brett and Schechter. Icahn Enterprises will allocate as much as $2.4 billion in its investment unit to the duo, including the money they already have under management, while High River LP, one of the elder Icahn's personal investment vehicles, will chip in $600 million.

The agreement stipulates that Carl will set the investment strategy and maintain oversight of the managers, who must get their boss's approval for certain investments.

Hedging Tools

The two can hedge their investments using futures and options on the Standard & Poor's 500 and Russell 2000 Indexes, and enter into short sales on securities they already hold. Such hedges are limited to $80 million of invested capital on any one security or index, and their total short positions can't exceed the combined value of their investments, or long positions. Short sales, used to profit from or protect assets against market declines, involve borrowing a stock or bond and then selling it in anticipation of a price decline.

When the agreement expires, Brett Icahn and Schechter will be able to disclose the track record they've established at Sargon to "market a permitted fund," according to the SEC filing. Should they decide to start their own fund, Icahn Enterprises and High River would be entitled to receive 15 percent of their gross management and incentives fees "in perpetuity," in return for an investment of at least $20 million in the fund.

Cohen, Robertson

"You see this in the larger investment houses," said Gary Goldstein, the chief executive officer of New York-based Whitney Group LLC, an executive search firm that focuses on financial services. "Steven Cohen does a very similar construct and Julian Robertson had a very similar concept," Goldstein said, citing two hedge-fund managers known for hiring young traders who go on to form their own firms.

Under terms of the new Icahn agreement, the managers are entitled to a lump-sum payment equaling 7.5 percent of any profits that exceed an annual 4 percent compounded hurdle rate.

Icahn Enterprises' investment unit had net assets of about $5.6 billion as of June 30, including $1.3 billion in cash, according to a Form 10-Q that the holding company filed Aug. 7 with the SEC. Icahn ran it as an activist hedge fund until 2011, when he returned the capital he had received from outside clients.

Activist Strategy

Icahn primarily takes stakes in companies he deems under- performing and then lobbies management to take steps to boost their share prices, such as stock buybacks, asset divestitures, or putting the entire enterprise up for sale. His previous targets have included Time Warner Inc., Motorola Inc., Biogen Idec Inc. and Yahoo! Inc.

Brett also has served on the boards of several companies that Icahn invested in, including Take-Two Interactive Software Inc. and Hain Celestial Group Inc. He is a graduate of Princeton University, where his father earned a philosophy degree.